Kelly Services Inc (KELYB) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Good morning, and welcome to Kelly Services Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) Today's call is being recorded at the request of Kelly Services. If anyone has any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host, Mr. George Corona, President and CEO. Sir, you may begin.

Thank you, John, and good morning. Welcome to Kelly Services 2017 Fourth Quarter Conference Call. With me on today's call is Olivier Thirot, our CFO.

Let me remind you that any comments made during this call, including the Q&A, may include forward-looking statements about our expectations for future performance. Actual results could differ materially from those suggested by our comments, and we have no obligation to update the statements made on this call. Please refer to our SEC filings for a description of the risk factors that could influence the company's actual future performance.

As we walk through our results this morning, let me point out that our year-over-year comparisons are represented in nominal currency with the exception of our International Staffing segment, which is in constant currency.

2017 was a year of focus and acceleration for Kelly. We drove strong top line growth, increased our GP and operating earnings and improved our conversion rate while also making strategic investments in talent and technology that will help power our future success.

Turning to Kelly's fourth quarter results. Revenue was $1.4 billion, up 9% compared to last year. And for the full year, revenue was $5.4 billion compared to $5.1 billion in 2016, excluding our APAC staffing operations.

For the quarter, we achieved earnings from operations of $28 million compared to $20 million last year. And for the full year, we reported operating earnings of $83 million compared to $63 million for 2016.

Kelly's fourth quarter earnings from continuing operations were $0.45 per share compared to earnings of $0.51 per share for the same period last year.

For the full year, earnings were $1.81 per share compared to earnings of $3.08 per share for the same period last year. The year-over-year differences are attributable in large part to the 2016 APAC joint venture and the Tax Cuts and Jobs Act. Excluding these noncash charges, both fourth quarter and full year earnings per share were up 57% year-over-year.

All told, 2017 was a year in which we sharpened our focus, accelerated investment and established strategic priorities that yielded strong results for Kelly.

Now let's take a closer look at the performance of each of our business segments, starting with the Americas. Americas Staffing is comprised of commercial staffing, Kelly Educational Staffing and Professional and Technical specialties.

Americas Staffing revenue increased 11% in the fourth quarter compared to the same period last year. Commercial staffing revenue increased 8% over prior year, consistent with the increase we reported in Q3 and compared to the 6% increase in Q2 and the 1% increase in Q1. Our fourth quarter growth in commercial staffing came from existing customers as well as new customer wins.

Kelly Educational Staffing delivered revenue growth of 30% in the fourth quarter. This growth rate was favorably impacted by the September acquisition of Teachers On Call. Excluding Teachers On Call, KES grew 11% in the fourth quarter.

Revenue in our Professional and Technical specialties increased 7% in the fourth quarter compared to prior year, with accelerated sequential and year-over-year growth in all specialties. Growth in the Americas increased as the investments we made in recruiters and sales resources during the first half of the year began to yield results in all areas. On a combined basis, total perm fees were up 40% year-over-year, with growth in both commercial and Professional and Technical specialties.

For the fourth quarter, gross profit rate in the Americas Staffing was 18.9%, up 60 basis points from a year ago due to effective management of employee-related cost and higher perm fees, partially offset by changes in business mix.

Expenses for the quarter were up in the Americas Staffing by 12% year-over-year, primarily the result of adding sales and recruiting resources during the first half of the year to capture increased demand as well as increases in performance-based compensation and the addition of Teachers On Call.

All told, the Americas Staffing segment achieved an operating profit of $27.8 million for the -- in the quarter, up 27% from the previous year. For the full year 2017, the Americas delivered $83 million in operating profit, up 18% from last year, excluding restructuring.

Let's now turn to our International Staffing operations outside the Americas. Revenue in International Staffing increased 17% compared to the prior year in nominal U.S. dollars. On a constant currency basis, revenue increased 9% driven by growth across the regions in Europe.

For ease of reference, the remainder of my comments on International Staffing will be on a constant currency basis. Fee-based income for the fourth quarter was up 10% year-over-year.

The fourth quarter GP rate was 14.5%, in line with the same period last year. GP dollars increased 9% over prior year, mainly attributable to higher revenue driven by hours volume in our temp staffing business. Expenses increased 8% over the prior year.

Netting everything out, International Staffing's fourth quarter operating profit was $5.6 million, up 13% year-over-year. For the full year, the segment delivered earnings from operations of $22.1 million, up 44% over last year. The 2016 full year results exclude both the 2016 restructuring expenses and the results of our APAC staffing business.

Now let's turn to the results of our Global Talent Solutions, GTS reporting segment. This segment is the combination of our previously reported OCG segment plus our centrally delivered staffing operations. The GTS reporting segment reflects the 2 primary ways that large clients in this segment are buying from us: talent fulfillment and outcome-based services. I'll discuss each business' results separately, but first, let's take a look at how GTS performed as a whole in the fourth quarter.

GTS revenue was up 3% year-over-year while gross profit increased 15% for the quarter. Revenue increased year-over-year in our KellyConnect, Business Process Outsourcing, Contingent Workforce Outsourcing and Recruitment Process Outsourcing practices, offset by declines in our centralized staffing and payroll practices. We are pleased with our ability to deliver double-digit GP growth and higher GP rates by exercising price discipline and exiting low-margin accounts while continuing to invest in higher-margin solutions.

Now let's look at the gross profit results in each of the 2 GTS businesses. Our talent fulfillment business, which is made up of our Contingent Workforce Outsourcing, Payroll Process Outsourcing, Recruitment Process Outsourcing and centrally delivered staffing practices.

Gross profit in the talent fulfillment business was up 10% year-over-year, a significant improvement from the 2% growth we reported last quarter. We continue to see nice double-digit GP increases in our CWO practice from new programs in Q4 as well as year-over-year GP growth in our RPO practice.

We also had year-over-year GP increases in our centralized -- centrally delivered staffing and PPO practices as a result of effective management of employee-related costs.

The outcome-based services business is comprised of our BPO, KellyConnect, Kelly legal managed services and advisory services practices. Gross profit for outcome-based services increased 30% year-over-year, driven primarily by continued momentum and strong results in both KellyConnect and BPO. The double-digit year-over-year GP increases in our outcome-based services are the result of both program expansions and new wins.

Overall, the GTS segment gross profit rate was 20.2% for the quarter, up 210 basis points year-over-year, due largely to effective management of employee-related costs coupled with favorable practice and customer mix.

Expenses in GTS were up 3% year-over-year in the fourth quarter due to headcount and salary costs related to the addition of new programs, coupled with an increase in performance-based incentive costs. These increases were partially offset by a reduction in bad debt expense year-over-year due to a significant write-off recorded in the fourth quarter of 2016.

All told, GTS' fourth quarter operating profit was $25.6 million, up 75% over a year ago. This strong finish kept a solid 2017 performance for the full year. GTS had earnings from operations of $79 million excluding restructuring, a 35% increase over 2016.

Now I'll turn the call over to Olivier who will cover our quarterly and full year results for the entire company.

Thank you, George. Revenue totaled $1.4 billion, up 9% compared to the fourth quarter last year. Our reported revenue was favorably impacted by 170 basis points due to foreign exchange. So on a constant currency basis, revenue growth for the fourth quarter was up 7.3%.

Our Q4 performance also includes the result from our acquisition of Teachers On Call, which added about 130 basis points to our total revenue growth rate. Overall, our Q4 revenue growth rate reflects our continued strong top line performance in both Americas and International Staffing as well as modest top line performance in Global Talent Solutions.

Staffing placement fees were up 31% year-over-year, with strong fee growth in Americas and International Staffing. Excluding the impact of currency, fees were up 27%.

Overall, gross profit was up $35 million or 15%. Our gross profit rate for the quarter was 18.5%, up 100 basis points when compared to the first quarter of 2016. Our GP rate improvement reflects effective management of employee-related costs in our GTS and Americas Staffing businesses as well as continued [sectoral] GP rate improvement in GTS as we shift to higher-margin solutions within that segment. This was partially offset by changes in business mix in our Americas Staffing segment.

SG&A expenses were up 13% year-over-year. About half of our year-over-year increase is due to higher performance-based compensation expenses in both our operating units and at corporate as a direct result of our solid improvement in both GP growth and earnings from operations.

In addition, we have continued to invest in our Americas Staffing operations to capitalize on market opportunities, and we accelerated our investment in several initiatives designed to improve our technology and process automation.

Earnings from operations were $28.4 million in the fourth quarter compared with 2016 earnings of $19.8 million, up 43%.

For the fourth quarter, our conversion rate was up 210 basis points to 10.8% as compared to the same period of 2016.

On a full year basis, earnings from operations was $83.3 million or $85.7 million excluding restructuring compared to $63.2 million or $60.7 million excluding restructuring and our APAC staffing operations in 2016. That is a 41% improvement over the period on a like-for-like basis. In addition, our conversion rate for the full year was up 160 basis points to 9% excluding restructuring costs

Our performance reflects our efforts to produce higher earnings from both gross profit growth, which we achieved with a combination of top line growth and GP rate improvement and a balanced approach to expenses. Our expense control effort will continue, and we have started to redeploy some of those savings into initiatives designed to increase growth and improve efficiency in the future.

Income tax expenses for the fourth quarter was $12.7 million compared to $1.8 million reported in 2016. Included in the 2017 expense is a $13.9 million noncash charge due to the revaluation of our net deferred tax assets as a result of the Tax Cuts and Jobs Act.

And finally, diluted earnings per share for the fourth quarter of 2017 totaled $0.45 per share compared to $0.51 in 2016. Our 2017 earnings per share includes a $0.35 per share charge related to the Tax Cuts and Jobs Act.

Now looking ahead to 2018. For the full year, we anticipate revenue to be up 5% to 6%, including the impact of FX on revenue of approximately 100 basis points. We do anticipate that revenue growth rates will slow in the early part of the year as we have exited several large staffing accounts due to price discipline and then will improve progressively as we move through the remainder of the year.

We expect the gross profit rate to be up slightly on a year-over-year basis due to changes in business mix as we move to higher-margin solutions. We anticipate SG&A expense to be up 4% to 5%, which includes additional spending on our technology and efficiency initiatives.

Our outlook does include the impact of the change in accounting related to revenue recognition, which we do not expect to be material. We'll also be impacted by another accounting change effective in 2018 related to the treatment of unrealized gains and losses on our equity investment in shares of PERSOL holdings. Those gains and losses will be reflected on our P&L below earnings from operations beginning in the first quarter of 2018. We'll provide further information about the impact of these accounting changes in our Form 10-K, which will be filed with the SEC later this month.

Our 2018 annual income tax rate is expected to be in the low to mid-teens range, reflecting the ongoing impact of the Tax Cuts and Jobs Act. And while we'll benefit from the lower effective tax rate going forward, the cash impact of the tax law change is not expected to be material, and cash repatriation isn't planned since our global cash is already managed to minimize excess overseas balances. Accordingly, the tax law change will not affect our strategic focus or priorities.

Now moving to the balance sheet. Cash totaled $33 million compared to $30 million at year-end 2016. Debt was $10 million compared to no borrowings at the end of 2016. Our increased level of debt reflects our acquisition of Teachers On Call in the third quarter of 2017.

Accounts receivable was $1.3 billion and increased 13% year-over-year. Global DSO was 55 days compared to 53 days at year-end 2016.

In our cash flow year-to-date, we generated $47 million of free cash flow compared to $27 million of free cash flow in 2016. The improvement reflects improving earnings from operations and a continued focus on cash flow generation even while funding additional capital expenditures.

For more information on our performance, please review the fourth quarter slide deck, which is available on our website.

I'll now turn it back over to George for his concluding thoughts.

Thank you, Olivier. 2017 year was a good year for Kelly. We created and carried solid momentum throughout all 4 quarters, delivering strong top line growth and profitability gains even as we invested in our future.

We improved our GP rate, delivered year-over-year growth in earnings from operations and improved our conversion rate as we demonstrated gains in both volume and value drivers.

Our Americas and International Staffing operations continue to execute with energy and focus. We're seeing benefits from our investments in sales and recruiting talent, and we are pleased with the growth rate we achieved in 2017.

In Global Talent Solutions, we continue to invest in higher-margin solutions that align with market demands and deliver higher GP growth rates. We are pleased with the strong GP and operating earnings growth delivered by GTS in 2017.

As we look with confidence at the year ahead, we are committed to investing in the talent and technology that will drive our future. We are focusing on our strengths, accelerating our investments where we know we can win and leveraging technology to connect with talent like never before.

Our acquisition of Teachers On Call and decision to exit health care exemplifies our commitment to focus and grow in the solutions that can make the biggest difference now and in the future.

I would like to personally thank Kelly's teams for all their great work in 2017 and for connecting companies and talented people with excellence and integrity.

Olivier and I will now be happy to answer your questions.

(Operator Instructions) And we'll go to the line of John Healy with Northcoast Research.

George, I was hoping you could talk a little bit more about the revenue cadence for 2018. Is it that the growth rate should accelerate year-over-year as we move throughout the year? I was just hoping that you could help us understand some of the contract items as well as how the M&A that you've done this year may impact things. And then along with that, just, I guess, the general cadence and if there's a segment level where some of those accounts might be that you've [lost].

Yes. Let me start, and then Olivier will fill in a lot of the details. So yes, as we're saying, the first quarter will be a little bit lower growth rate, and the growth rate will increase as we go throughout the year, primarily the result of customers that we've exited because of pricing discipline as we'd look at them and we look at the profitability of those accounts. And so as we've been doing that and we accelerated that pace in the fourth quarter of this year, you'll see a little bit of growth rate come down a bit in the first quarter, and then it will accelerate throughout the year. I'll let Olivier talk about some of the details associated with that.

Yes. I mean, to follow up on what George was saying on -- of course, I mean, pricing discipline is good for GP and value improvement, but we know that on the pure revenue side, might be visible especially at the beginning of the year. Knowing that these customers -- staffing customers are -- usually have low margin, we don't expect a big impact on GP side, or even less on a bottom line basis. I mean, to give you an idea, the value profile of these customers, when you look at their GP margin, it's about half of the GPs that we have overall of the GP margin or GP rate we have for GTS staffing. I think the other thing to consider is our divestiture of health care that is, of course -- is going to push a little bit our revenue down in the first -- at least at the beginning of the year. Looking back at the guidance, I mean, 5% to 6% growth in revenue, if you look at 2017, we have been overall at 5.7%. We expect to continue to improve our GP rates, as we have seen for the last 3 years, because we -- as George was explaining, we moved more and more to more added value type of solutions. And as we have seen in 2017, we see the pure volume dynamic accelerated -- or accelerating over time from Q1 to Q2 and Q3 and Q4.

Yes. And John, I would say we continue to see good demand in the marketplace for our services, which is giving us the confidence to be able to reevaluate our portfolio and make sure that we're doing the things that make a big difference.

Great. And I just wanted to ask about the conversion rate. I think you mentioned it was 9% in the quarter, which is a nice acceleration for you guys compared to previous years. Just kind of curious, your thoughts of where you would ideally like to see that number, where you think that you can maybe push that maybe over the next couple of years.

Yes. John, as we've talked before, we don't give forward guidance on that, but what we have said is that we see that there still is significant room for Kelly to improve, and we expect every year into the future to continue to make progress on improving that number. There's a lot of room to move based on what we see out there.

Okay. And just one final question for me. This year is probably the first acquisition I've seen you guys do in many years, and you also sold a business in the fourth quarter. Do you think there's much [churning] of the portfolio that will take place in 2018, maybe accelerating? Or is there not much left to do?

As we look at the portfolio, John, we will continue to evaluate it now and into the future. So there's nothing on the horizon right now, but we continue to look at the portfolio to see what we can do. And we'll also look at the other side of the transaction as well to say, should we deploy capital to continue to invest in the things that we're really good at as we expect that we want to continue to be a significant player in the areas where we have strength. And Teachers On Call was a perfect example of that.

I think it's all about focus and making sure we are more selective on where we invest.

(Operator Instructions) And allowing a few moments, Mr. Corona, no further questions coming in.

Okay. Well, thank you, John, and thank you, everyone.

Thank you.

Ladies and gentlemen, this conference is available for replay and starts today at 11:30 a.m. Eastern time and will last through March 1, 2018, at midnight. You can access the replay at any time. Please dial 1 (800) 475-6701 or (320) 365-3844. The access code is 393788. That does conclude your conference for today. Thank you for your participation. You may now disconnect.